<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 0-23827
PC CONNECTION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0513618
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
730 MILFORD ROAD,
MERRIMACK, NEW HAMPSHIRE 03054
------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (603) 423-2000
--------------
Indicate by check mark (X) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
-------- --------
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of July 27, 2000 was 24,141,894.
================================================================================
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
--------------------- ----
<S> <C> <C>
Item 1 Financial Statements:
Independent Accountants' Report......................................... 1
Condensed Consolidated Balance Sheets - June 30, 2000
and December 31, 1999................................................... 2
Condensed Consolidated Statements of Income -
Three months ended June 30, 2000 and 1999;
Six months ended June 30, 2000 and 1999................................. 3
Condensed Consolidated Statement of Changes in Stockholders' Equity Six
months ended June 30, 2000.............................................. 4
Condensed Consolidated Statements of Cash Flows Six
months ended June 30, 2000 and 1999..................................... 5
Notes to Condensed Consolidated Financial Statements.................... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 10
Item 3 Qualitative and Quantitative Disclosures About Market Risk.............. 15
PART II OTHER INFORMATION
-----------------
Item 1 Legal Proceedings....................................................... 17
Item 2 Changes in Securities and Use of Proceeds............................... 17
Item 3 Defaults Upon Senior Securities......................................... 17
Item 4 Submission of Matters to a Vote of Security Holders..................... 17
Item 5 Other Information....................................................... 17
Item 6 Exhibits and Reports on Form 8-K........................................ 17
SIGNATURES.............................................................. 18
----------
</TABLE>
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
PC Connection, Inc. and Subsidiaries
Merrimack, New Hampshire
We have reviewed the accompanying condensed consolidated balance sheet of PC
Connection, Inc. and subsidiaries (the "Company") as of June 30, 2000, and the
related condensed consolidated statements of income, changes in stockholders'
equity and cash flows for the three-month and six-month periods then ended
listed as Part 1, Item 1 in the Table of Contents included on Form 10 -Q for the
quarterly period ended June 30, 2000. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of PC
Connection, Inc and subsidiaries as of December 31, 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated January 26,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1999 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 18, 2000
-1-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
-----------------------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 19,217 $ 20,416
Accounts receivable, net 134,019 99,405
Inventories-merchandise 69,625 64,348
Deferred income taxes 1,698 1,991
Prepaid expenses and other current assets 8,242 4,651
-------- --------
TOTAL CURRENT ASSETS 232,801 190,811
Property and equipment, net 26,325 23,126
Goodwill 9,860 9,431
Other assets 530 169
-------- --------
TOTAL ASSETS $269,516 $223,537
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligation to affiliate $ 175 $ 137
Notes payable, current maturities 1,000 1,000
Accounts payable 131,520 105,547
Accrued expenses and other liabilities 11,783 11,877
-------- --------
TOTAL CURRENT LIABILITIES 144,478 118,561
Notes payable, less current maturities 1,000 2,000
Capital lease obligation to affiliate 6,871 6,945
Deferred taxes 1,157 1,579
Other liabilities 171 229
-------- --------
TOTAL LIABILITIES 153,677 129,314
-------- --------
Stockholders' Equity:
Common stock 241 237
Additional paid-in capital 64,440 58,548
Retained earnings 51,158 35,438
-------- --------
Total stockholders' equity 115,839 94,223
-------- --------
Total liabilities and stockholders' equity $269,516 $223,537
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
Part I - Financial Information
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $358,241 $231,833 $684,333 $456,812
Cost of sales 313,296 204,034 598,758 401,947
-------- -------- -------- --------
Gross profit 44,945 27,799 85,575 54,865
Selling, general and administrative expenses 30,903 20,040 59,910 39,803
-------- -------- -------- --------
INCOME FROM OPERATIONS 14,042 7,759 25,665 15,062
Interest expense (334) (276) (674) (542)
Other, net 165 47 369 141
-------- -------- -------- --------
Income before taxes 13,873 7,530 25,360 14,661
Income taxes (5,272) (2,862) (9,640) (5,572)
-------- -------- -------- --------
NET INCOME $ 8,601 $ 4,668 $ 15,720 $ 9,089
======== ======== ======== ========
Earnings per common share:
Basic $ 0.36 $ 0.20 $ 0.66 $ 0.39
======== ======== ======== ========
Diluted $ 0.34 $ 0.19 $ 0.62 $ 0.38
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
-3-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
COMMON STOCK
------------ ADDITIONAL RETAINED
SHARES AMOUNT PAID IN CAPITAL EARNINGS TOTAL
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 23,653 $ 237 $ 58,548 $ 35,438 $ 94,223
Exercise of stock options, including
income tax benefits 397 4 5,362 - 5,366
Issuance of stock under employee stock
purchase plan 25 - 479 - 479
Compensation under nonstatutory
stock option agreements - - 51 - 51
Net income - - - 15,720 15,720
------ ----- -------- -------- --------
Balance, June 30, 2000 24,075 $ 241 $ 64,440 $ 51,158 $115,839
====== ===== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Six Months Ended June 30,
----------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,720 $ 9,089
Adjustments to reconcile net income to net cash
provided by (used for)
operating activities:
Depreciation and amortization 3,036 2,367
Deferred income tax provision 2,579 1,277
Compensation under nonstatutory stock option
agreements 51 66
Provision for doubtful accounts 4,443 2,896
Loss on disposal of fixed assets 24 24
Changes in assets and liabilities:
Accounts receivable (38,557) (12,767)
Inventories (5,277) 1,206
Prepaid expenses and other current assets (3,591) 912
Other non-current assets (361) -
Accounts payable 26,227 (7,283)
Accrued expenses and other liabilities (25) (108)
--------- ---------
Net cash provided by (used for) operating
activities 4,269 (2,321)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,233) (3,415)
Proceeds from sale of property and equipment 74 3
Payment for acquisitions, net of cash acquired (2,158) (3,198)
--------- ---------
Net cash used for investing activities (7,317) (6,610)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 167,961 246,251
Repayment of short-term borrowings (167,961) (246,251)
Repayment of notes payable (1,000) -
Repayment of capital lease obligations (36) (58)
Issuance of stock upon exercise of nonstatutory
stock options 2,406 116
Issuance of stock under Employee Stock Purchase
Plan 479 198
--------- ---------
Net cash provided by financing activities 1,849 256
--------- ---------
Decrease in cash and cash equivalents (1,199) (8,675)
Cash and cash equivalents, beginning of period 20,416 11,910
--------- ---------
Cash and cash equivalents, end of period $ 19,217 $ 3,235
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 293 $ 273
Income taxes paid 10,957 2,414
NON-CASH:
Issuance of notes payable in connection with
acquisition of a subsidiary $ - $ 3,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 1-BASIS OF PRESENTATION
--------------------------------------------------------------------------------
The accompanying condensed consolidated financial statements of PC Connection,
Inc. and Subsidiaries ("PCC" or the "Company") have been prepared in accordance
with accounting principles generally accepted in the United States of America.
Such principles were applied on a basis consistent with those of the financial
statements contained in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1999 (the "10-K/A Report") filed with the Securities and
Exchange Commission ("SEC"). The accompanying condensed consolidated financial
statements should be read in conjunction with the financial statements contained
in the Company's Annual Report on Form 10K/A. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation. The operating results for the three and six months ended June
30, 2000 may not be indicative of the results expected for any succeeding
quarter or the entire year ending December 31, 2000.
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
In April 2000, the Company's Board of Directors approved a three-for-two stock
split of its outstanding shares of Common Stock to be effected in the form of a
50% stock dividend. The dividend was distributed on May 23, 2000 to the
Company's stockholders of record as of the close of business on May 12, 2000.
All per share and related amounts contained in these financial statements and
notes have been adjusted retroactively to reflect the stock split.
REVENUE RECOGNITION
Revenue on product sales is recognized at the point in time when persuasive
evidence of an arrangement exists, the price is fixed and final, delivery has
occurred and there is a reasonable assurance of collection of the sales
proceeds. The Company generally obtains oral or written purchase authorizations
from its customers for a specified amount of product at a specified price and
considers delivery to have occurred at the point of shipment. The Company
provides its customers with a limited thirty day right of return only for
defective merchandise. Revenue is recognized at shipment and a reserve for sales
returns is recorded. The Company has demonstrated the ability to make reasonable
and reliable estimates of product returns in accordance with SFAS No. 48 based
on significant historical experience.
INVENTORIES--MERCHANDISE
Inventories (all finished goods) consisting of software packages, computer
systems and peripheral equipment, are stated at cost (determined under the
first-in, first-out method) or market, whichever is lower. Provisions are made
currently for obsolete, slow moving and nonsalable inventory.
--------------------------------------------------------------------------------
NOTE 2-EARNINGS PER SHARE
--------------------------------------------------------------------------------
Basic earnings per common share is computed using the weighted average number of
shares outstanding. Diluted earnings per common share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common stock.
-6-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 2-EARNINGS PER SHARE - CONT'D.
--------------------------------------------------------------------------------
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
Ended Ended
------------------------------------------------------------------------------------------------
JUNE 30, (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 8,601 $ 4,668 $15,720 $ 9,089
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share:
Weighted average shares 23,926 23,441 23,801 23,438
Dilutive effect of unexercised
employee stock options: 1,630 645 1,505 663
------- ------- ------- -------
Denominator for diluted earnings per share 25,556 24,086 25,306 24,101
======= ======= ======= =======
Earnings per share:
Basic $ .36 $ .20 $ .66 $ .39
======= ======= ======= =======
Diluted $ .34 $ .19 $ .62 $ .38
======= ======= ======= =======
</TABLE>
The following unexercised stock options were excluded from the computation of
diluted earnings per share for the three and six months ended June 30, 2000 and
1999 because the effect of the options on the calculation would have been anti-
dilutive:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------------------------------------------
JUNE 30, (AMOUNTS IN THOUSANDS) 2000 1999 2000 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Anti-dilutive stock options 362 1,353 4,273 1,317
=== ===== ===== =====
</TABLE>
------------------------------------------------------------------------------
NOTE 3-REPORTING COMPREHENSIVE INCOME
------------------------------------------------------------------------------
Statement of Financial Accounting Standards ('SFAS") No. 130 "Reporting
Comprehensive Income," requires the reporting of comprehensive income in
addition to net income. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net income.
Based on the current financial structure and operations of the Company, the
Company had no other components to be included in comprehensive income.
Therefore, comprehensive income is the same as net income reported for the three
and six months ended June 30, 2000 and 1999.
-7-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 4-RECENT AND ANTICIPATED ACCOUNTING PRONOUNCEMENTS
--------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," adjusted to
be effective for fiscal years beginning after June 15, 2000. The new standard
requires that all companies record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. Management is
currently assessing the impact of SFAS No. 133 on the financial statements of
the Company. The Company will adopt this accounting standard on January 1, 2001,
as required.
In December, 1999 the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB clarifies certain elements of revenue recognition. Since
December, the SEC has issued several amendments that have effectively postponed
the implementation date until the fourth quarter of fiscal 2000. The
implementation date was postponed so that a Frequently Asked Questions document
could be prepared and distributed. Management currently believes that the
implementation of the SAB will not have a material impact on the Company's
financial statements.
--------------------------------------------------------------------------------
NOTE 5-ACQUISITION
--------------------------------------------------------------------------------
On January 4, 2000 the Company acquired the Merisel Americas Inc., call center
in Marlborough, Massachusetts for approximately $2.2 million including
acquisition costs. The Company acquired the assembled work force of Merisel, as
well as its fixed assets; it also assumed its lease liabilities. The excess of
the purchase price over the fair value of the assets acquired totaled
approximately $1.3 million. Such excess will be amortized over a period of 15
years. Operating results of PC Connection would not have been materially
different from those reported for the six months ended June 30, 1999 had the
acquisition occurred on January 1, 1999.
--------------------------------------------------------------------------------
NOTE 6-SEGMENT AND RELATED DISCLOSURES
--------------------------------------------------------------------------------
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires that public companies report profits and losses and
certain other information on its "reportable operating segments" in its annual
and interim financial statements.
Management has determined that the Company has only one "reportable operating
segment," given the financial information provided to and used by the "chief
decision maker" of the Company to allocate resources and assess the Company's
performance. However, senior management does monitor revenue by platform (PC vs.
Mac), sales channel (Corporate Outbound, Inbound Telesales and On-line
Internet), and product mix (Computer Systems and Memory, Peripherals, Software,
and Networking and Communications).
-8-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 6-SEGMENT AND RELATED DISCLOSURES - CONT'D.
--------------------------------------------------------------------------------
Net sales by platform, sales channel and product mix are presented below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------------------------------------------------
JUNE 30, (amounts in thousands) 2000 1999 2000 1999
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Platform
--------
PC and Multi Platform $319,348 $194,166 $605,276 $376,624
Mac 38,893 37,667 79,057 80,188
-------- -------- -------- --------
Total $358,241 $231,833 $684,333 $456,812
======== ======== ======== ========
Sales Channel
-------------
Corporate Outbound $274,488 $147,331 $511,039 $276,008
Inbound Telesales 57,630 72,274 123,093 156,541
On-Line Internet 26,123 12,228 50,201 24,263
-------- -------- -------- --------
Total $358,241 $231,833 $684,333 $456,812
======== ======== ======== ========
Product Mix
-----------
Computer Systems and Memory $186,015 $111,102 $356,485 $217,453
Peripherals 100,112 74,891 195,495 150,537
Software 40,144 30,637 76,560 59,262
Networking and Communications 31,970 15,203 55,793 29,560
-------- -------- -------- --------
Total $358,241 $231,833 $684,333 $456,812
======== ======== ======== ========
</TABLE>
Substantially, all of the Company's net sales for the quarters ended June 30,
2000 and 1999 were made to customers located in the United States. Shipments to
customers located in foreign countries aggregated less than 2% in those
respective quarters. All of the Company's assets at June 30, 2000 and December
31, 1999 were located in the United States. The Company's primary target
customers are small- to medium-size businesses ("SMBs") comprised of 20 to 1,000
employees, although its customers also include individual consumers, larger
companies, federal, state and local governmental agencies and educational
institutions. Except for the federal government, no single customer accounted
for more than 3% of total net sales in the six months ended June 30, 2000 and
1999. Sales to the federal government accounted for $53.7 million, or 7.8% of
total net sales for the six months ended June 30, 2000 and $8.8 million or 1.9%
of total net sales for the six months ended June 30, 1999.
-9-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
OVERVIEW
--------------------------------------------------------------------------------
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements based on management's
current expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by management. All statements,
trends, analyses and other information contained in this report relative to
trends in net sales, gross margin and anticipated expense levels, as well as
other statements, including words such as "anticipate," "believe," "plan,"
"estimate," "expect," and "intend" and other similar expressions, constitute
forward-looking statements. These forward-looking statements involve risks and
uncertainties, and actual results may differ materially from those anticipated
or expressed in such statements. Potential risks and uncertainties include,
among others, those set forth in Item 7 under the caption "Factors That May
Affect Future Results and Financial Condition" in the Company's Annual Report on
Form 10-K and its amendments for the year ended December 31, 1999 filed with the
SEC, which are incorporated by reference herein. Particular attention should be
paid to the cautionary statements involving the industry's rapid technological
change and exposure to inventory obsolescence, availability and allocation of
goods, reliance on vendor support and relationships, competitive risks, pricing
risks, and economic risks. Except as required by law, the Company undertakes no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise. Readers, however, should carefully
review the factors set forth in other reports or documents that the Company
files from time to time with the SEC.
--------------------------------------------------------------------------------
GENERAL
--------------------------------------------------------------------------------
The Company was founded in 1982 as a mail-order business offering a broad range
of software and accessories for IBM and IBM-compatible personal computers
("PCs"). The founders' goal was to provide consumers with superior service and
high quality branded products at competitive prices. The Company initially
sought customers through advertising in magazines and the use of inbound toll
free telemarketing. Currently, the Company seeks to generate sales through (i)
outbound telemarketing by account managers focused on the business, education
and government markets, (ii) inbound calls from customers responding to the
Company's catalogs and other advertising and (iii) the Company's Internet Web
site.
The Company offers both PC compatible products and Mac personal computer
compatible products. Reliance on Mac product sales has decreased over the last
three years, from 23.0% of net sales for the year ended December 31, 1996 to
11.6% of net sales for the six months ended June 30, 2000. The Company believes
that such sales will continue to decrease as a percentage of net sales and may
decline in dollar volume in future periods.
-10-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE THREE MONTHS
AND SIX MONTHS ENDED JUNE 30, 1999
The following table sets forth for the periods indicated information derived
from the Company's statements of income expressed as a percentage of net sales.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------------------------------------------------------------
JUNE 30, 2000 1999 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales (in millions)....................... $358.2 $231.8 $684.3 $456.8
Net sales..................................... 100.0% 100.0% 100.0% 100.0%
Gross profit.................................. 12.6 12.0 12.5 12.0
Selling, general and administrative expenses.. 8.6 8.6 8.8 8.7
Income from operations........................ 3.9 3.4 3.8 3.3
Interest expense.............................. 0.1 0.1 0.1 0.1
Income before income taxes.................... 3.9 3.2 3.7 3.2
Income taxes.................................. 1.5 1.2 1.4 1.2
Net income.................................... 2.4 2.0 2.3 2.0
</TABLE>
The following table sets forth the Company's percentage of net sales by
platform, sales channel, and product mix:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------------------------------------------------
JUNE 30, 2000 1999 2000 1999
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Platform
--------
PC and Multi-Platform.......... 89% 84% 88% 82%
Mac............................ 11 16 12 18
---- ---- ---- ----
Total......................... 100% 100% 100% 100%
==== ==== ==== ====
Sales Channel
-------------
Corporate Outbound............. 77% 64% 75% 61%
Inbound Telesales.............. 16 31 18 34
On-Line Internet............... 7 5 7 5
---- ---- ---- ----
Total......................... 100% 100% 100% 100%
==== ==== ==== ====
Product Mix
-----------
Computer Systems and Memory.... 52% 48% 52% 48%
Peripherals.................... 28 32 29 33
Software....................... 11 13 11 13
Networking and Communications.. 9 7 8 6
---- ---- ---- ----
Total......................... 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
-11-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS - GENERAL - CONT'D.
--------------------------------------------------------------------------------
NET SALES increased $126.4 million, or 54.5%, to $358.2 million for the quarter
ended June 30, 2000 from $231.8 million for the comparable period in 1999. Net
sales for the six months ended June 30, 2000 increased $227.5 million, or 49.8%,
to $684.3 million from $456.8 million for the comparable period in 1999. Growth
in net sales was primarily attributable to the continued expansion and increased
productivity of the Company's outbound telemarketing group, continued growth in
average order size, and growth in the Company's Internet sales. Outbound sales
increased $127.2 million, or 86.3%, to $274.5 million in the three months ended
June 30, 2000 from $147.3 million in the three months ended June 30, 1999.
Outbound sales increased $235.0 million, or 85.1%, to $511.0 million for the six
months ended June 30, 2000 from $276.0 in the comparable period in 1999. Inbound
sales for the quarter decreased $14.6 million, or 20.2%, to $57.6 million in
the quarter ended June 30, 2000 from $72.2 in the comparable period in 1999; and
decreased $33.4 million, or 21.3% to $123.1 million for the six months ended
June 30, 2000 from $156.5 million in the comparable period in 1999. On-line
Internet sales increased $13.9 million, or 113.9%, to $26.1 million in the three
months ended June 30, 2000 from $12.2 million in the comparable period in 1999.
All of the Company's product categories experienced strong growth in the quarter
ended June 30, 2000 over the comparable period in 1999, with sales of networking
and communication products representing the Company's fastest growing product
category with 110.3% growth in net sales over the second quarter of 1999.
Management believes that this category will continue to grow substantially as
its customers further upgrade their network and communications infrastructure.
Sales of computer systems continue to be the largest product category. Computer
system/memory sales increased to 51.9% and 52.0% of net sales for the three
months and six months ended June 30, 2000, respectively, from 47.9% and 47.6%
for the respective comparable periods in 1999.
Sales of computer systems result in a relatively high dollar sales order, as
reflected in the increase in the Company's average order size from $741 in the
quarter ended June 30, 1999 to $1,183 in the quarter ended June 30, 2000.
Computer system sales generally provide the largest gross profit dollar
contribution per order of all of the Company's products, although they usually
yield the lowest gross margin percentage.
GROSS PROFIT increased $17.1 million, or 61.5%, to $44.9 million for the quarter
ended June 30, 2000 from $27.8 million for the comparable period in 1999. Gross
profit for the six months ended June 30, 2000 increased $30.7 million, or 55.9%,
to $85.6 million from $54.9 million for the comparable period in 1999. Gross
profit margin as a percentage of net sales increased to 12.6% in the second
quarter of 2000 from 12.0% for the comparable period in 1999. Gross profit
margin as a percentage of net sales increased to 12.5% in the first six months
of 2000 from 12.0% for the comparable period in 1999. The margin improvement
resulted from a continuing focus on solutions sales to business, government and
educational customers, stable average selling prices, and the impact of various
profitability improvement programs. The Company's profit margins are also
influenced by, among other things, industry pricing and the relative mix of
inbound, outbound, and on-line Internet Sales. Generally, pricing in the
computer and related products market is very aggressive and the Company intends
to maintain prices at competitive levels. Since outbound sales are typically to
corporate accounts that purchase at volume discounts, the gross margin on such
sales is generally lower than inbound sales. The gross profit dollar
contribution per outbound sale order is generally higher as average sizes of
orders to corporate accounts are usually larger. As stated in previous reports,
the Company expects that its gross margin, as a percentage of sales, may vary by
quarter based upon vendor support programs, product mix, pricing strategies,
market conditions and other factors.
-12-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS - GENERAL - CONT'D.
--------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $10.9 million, or 54.5%,
to $30.9 million for the quarter ended June 30, 2000 from $20.0 million for the
comparable quarter in 1999. Such expenses for the six months ended June 30, 2000
increased by $20.1 million, or 50.5%, to $59.9 million from $39.8 million in the
six months ended June 30, 1999. The increase in expenses was primarily
attributable to increases in volume-sensitive costs such as sales personnel,
facility costs, provision for doubtful accounts, depreciation, and costs
associated with the January 2000 acquisition of Merisel's Marlborough, MA call
center. Such costs remained a consistent percentage of net sales over the
comparable periods presented here.
INCOME FROM OPERATIONS increased $6.2 million, or 79.5%, to $14.0 million for
the quarter ended June 30, 2000, from $7.8 million for the comparable period in
1999. Income from operations as a percentage of sales increased from 3.4% in the
three months ended June 30, 1999 to 3.9% for the comparable period in 2000 for
the reasons discussed above. Similarly, income from operations for the six
months ended June 30, 2000 increased $10.6 million, or 70.2%, to $25.7 million
from $15.1 million for the comparable period in 1999. Income from operations as
a percentage of sales increased from 3.3% for the six months ended June 30, 1999
to 3.8% for the comparable period in 2000, primarily due to gross margin
improvement and as the result of the leveraging of selling, general and
administrative expenses over a larger sales base.
INTEREST EXPENSE increased $58,000, or 21.0%, to $334,000 for the quarter ended
June 30, 2000 from $276,000, for the comparable quarter in 1999. Similarly,
interest expense for the six months ended June 30, 2000, increased $132,000, or
24.4%, to $674,000 from $542,000 for the comparable period in 1999. This
increase in interest expense was primarily due to debt associated with the June
1999 acquisition of Comteq Federal, Inc. Such debt was not outstanding during
the majority of the first six-months of fiscal 1999.
INCOME TAXES for the quarter ended June 30, 2000 were $5.3 million compared to
$2.9 million for the comparable quarter in 1999. Income taxes for the six months
ended June 30, 1999 were $9.6 million, compared to $5.6 million for the
comparable period in 1999. The effective tax rate was 38% for all periods.
OTHER, NET, which is essentially comprised of interest income increased
$118,000, or 251.1%, to $165,000 in the quarter ended June 30, 2000 from
$47,000, for the comparable period in 1999. Similarly, other, net for the six
months ended June 30, 2000 increased $228,000, or 161.7%, to $369,000 from
$141,000 in the comparable 1999 period. This increase was due primarily to
higher interest income from investments.
NET INCOME for the quarter ended June 30, 2000 increased $3.9 million, or 82.9%,
to $8.6 million from $4.7 million for the comparable quarter in 1999,
principally as a result of the increases in operating income as described above.
Net income increased $6.6 million, or 72.5%, to $15.7 million for the six months
ended June 30, 2000 from $9.1 million for the comparable period in 1999.
-13-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------
The Company has historically financed its operations and capital expenditures
through cash flow from operations and bank borrowings. The Company believes
that funds generated from operations, together with available credit under its
bank line of credit, will be sufficient to finance its working capital and
capital expenditure requirements at least through 2000. The Company's ability to
continue funding its planned growth is dependent upon its ability to generate
sufficient cash flow from operations or to obtain additional funds through
equity or debt financing, or from other sources of financing, as may be
required.
At June 30, 2000, the Company had cash and cash equivalents of $19.2 million and
working capital of $88.3 million. At December 31, 1999, the Company had cash and
cash equivalents of $20.4 million and working capital of $72.3 million.
The Company has an unsecured credit agreement with a bank providing for short-
term borrowings up to $50.0 million, which bears interest at various rates
ranging from the prime rate (9.50% at June 30, 2000) to prime less 1%, depending
on the ratio of senior debt to EBITDA (earnings before interest, taxes,
depreciation and amortization). The credit agreement includes various customary
financial and operating covenants, including restrictions on the payment of
dividends, none of which the Company believes significantly restricts its
operations. No borrowings were outstanding at June 30, 2000.
Net cash provided by operating activities was $4.3 million for the six months
ended June 30, 2000, as compared to $2.3 million used for operating expenses in
the comparable period in 1999. The primary factors historically affecting cash
flows from operations are the Company's net income and changes in the levels of
accounts receivable, inventories and accounts payable. Historically accounts
receivable has increased primarily due to an increase in open account purchases
by commercial customers resulting from the Company's continued efforts to
increase its sales to such customers.
Capital expenditures were $5.2 million in the six months ended June 30, 2000 as
compared to $3.4 million in the comparable period in 1999. The majority of the
capital expenditures for the respective 2000 and 1999 periods relate to computer
hardware and software for the Company's information systems. Total capital
expenditures for the year ended December 31, 2000 are estimated to be $16.6
million.
--------------------------------------------------------------------------------
RECENTLY AND ANTICIPATED ACCOUNTING PRONOUNCEMENTS
--------------------------------------------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," adjusted to be effective for fiscal years
beginning after June 15, 2000. The new standard requires that all companies
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. Management is currently assessing the
impact of SFAS No. 133 on the financial statements of the Company. The Company
will adopt this accounting standard on January 1, 2001, as required.
In December, 1999 the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB clarifies certain elements of revenue recognition. Since
December, the SEC has issued several amendments that have effectively postponed
the implementation date until the fourth quarter of fiscal 2000. The
implementation date was postponed so that a Frequently Asked Questions document
could be prepared and distributed. Management currently believes that the
implementation of the SAB will not have a material impact on the Company's
financial statements.
-14-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
--------------------------------------------------------------------------------
INFLATION
--------------------------------------------------------------------------------
The Company has historically offset any inflation in operating costs by a
combination of increased productivity and price increases, where appropriate.
The Company does not expect inflation to have a significant impact on its
business in the future.
-15-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests cash balances in excess of operating requirements in short-
term securities, generally with maturities of 90 days or less. The Company
believes that the effect, if any, of reasonably possible near-term changes in
interest rates on the Company's financial position, results of operations and
cash flows should not be material.
-16-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Not applicable.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3 - Defaults upon Senior Securities
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2000 Annual Meeting of Stockholders of the Company (the "Annual
Meeting") on May 25, 2000, the following matters were acted upon by the
stockholders of the Company:
1. the election of five Directors;
2. the approval of an amendment to the Company's 1997 Stock Incentive Plan
to increase the number of shares of common stock available for grant
under the Plan by 600,000; and
3. the ratification of the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the current fiscal year.
The number of shares of Common Stock issued, outstanding and eligible to
vote as of the record date of March 29, 2000 was 15,796,151. The results of the
voting on each of the matters presented to stockholders at the Annual Meeting
are set forth below:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR WITHHELD AGAINST ABSTENTIONS NON-VOTES
<S> <C> <C> <C> <C> <C> <C>
1. Election of Directors:
Patricia Gallup 14,686,183 735,665 374,303 N.A. N.A.
David Hall 14,686,183 735,665 374,303 N.A N.A.
David B. Beffa-Negrini 14,686,183 735,665 374,303 N.A. N.A.
Martin C. Murrer 14,686,183 735,665 374,303 N.A. N.A.
Peter J. Baxter 14,686,183 735,665 374,303 N.A. N.A.
2. Amendment to 1997 Stock Incentive 14,691,350 735,665 360,521 8,615 N.A.
Plan
3. Ratification of the Appointment 15,057,659 735,665 2,635 192 N.A.
of Auditors
</TABLE>
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
15 Letter on unaudited interim financial information
(b) REPORTS ON FORM 8-K
-------------------
(i) The Company filed a current report on Form 8-K on June 8, 2000 due
to the distribution of a 50% Stock dividend representing a three-
for-two stock split of its outstanding shares of Common Stock.
-17-
<PAGE>
PC CONNECTION, INC. AND SUBSIDIARIES
JUNE 30, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PC CONNECTION, INC. AND SUBSIDIARIES
August 10, 2000 By: /s/ Wayne L. Wilson
----------------------
Wayne L. Wilson
President and Chief Operating Officer
August 10, 2000 By: /s/ Mark A. Gavin
--------------------
Mark A. Gavin
Senior Vice President of Finance and Chief
Financial Officer
-18-
